What is fiscal policy?

Fiscal policy refers specifically to the government's use of taxation and spending to influence the economy. This strategy can be employed to stimulate economic growth, manage inflation, and mitigate unemployment by adjusting levels of public spending and taxation. When a government increases spending or reduces taxes, it typically aims to boost demand in the economy, thereby encouraging growth. Conversely, decreasing spending or increasing taxes can help cool down an overheated economy.

The other options focus on different aspects of economic policy. The choice that relates to controlling the money supply and interest rates describes monetary policy, which is primarily managed by central banks rather than the government. The Federal Reserve's overall strategy is also part of monetary policy rather than fiscal policy. Lastly, state policies affecting local budgets do not encompass the broader implications of fiscal policy at a national level. Thus, option B accurately captures the essence of fiscal policy and its role in shaping economic conditions.